We have produced this ratings model to assist investors in assessing relative sovereign risk over a wide range of Developed Markets (DM), 30 in all. Scores directly reflect a country’s creditworthiness and its underlying ability to service sovereign debt obligations.
Each country’s score is determined through a weighted compilation of fifteen economic and political indicators, which include debt/GDP, current account/GDP, GDP growth, actual and structural budget balance, per capita GDP, political risk, banking sector strength, and inflation. We changed the methodology slightly last year to include Net International Investment Position (NIIP) and the national savings rate.
These scores translate into a BBH implied rating that is meant to reflect the accepted rating methodology used by the major rating agencies.
DEVELOPED MARKETS RATINGS SUMMARY
There were 6 DM rating actions that were recorded since our last update, all positive. For all of 2017, the total was 26 positive and 2 negative. In 2016, the count was 12 negative and 10 positive and so there is a clear and very strong improving trend within DM. This should carry over into 2018.
Fitch was the most positive with four moves since our last update. It upgraded Iceland from A- to A and Ireland from A to A+. In an aggressive two notch move, S&P restored Portugal to investment grade BBB from BB+. Lastly, it upgraded Spain from BBB+ to A-. All now have stable outlooks.
S&P had two positive moves. It upgraded Italy from BBB- to BBB with stable outlook. S&P also upgraded Greece by a notch to B with positive outlook. Moody’s had no moves in either direction in DM.
DEVELOPED MARKETS RATINGS OUTLOOK
The stronger AAA credits (the Scandies and northern eurozone) saw their scores improve and easily maintained their standings this round. Of note, the US score deteriorated modestly and it was enough to move it (barely) into AA+ territory. This bears watching. If the recent tax cuts lead to significant fiscal deterioration, it could be the trigger for rating actions on the US. Canada’s score also worsened, but not by enough to impact its implied AAA rating. Iceland remains firmly in AAA territory, suggesting upgrade potential to actual ratings of A/A3/A.
Within the AA credits, most scores worsened modestly. However, none of the other AA countries saw their implied ratings fall. As noted before, the US has fallen into this grouping now. Of note, Malta, Ireland, and Japan appear to enjoy upgrade potential. On the other hand, France and Belgium appear to be correctly rated by the agencies.
Within the A credits, scores were mixed. Of note, Spain moved up into this category with a one notch improvement in its implied rating to A-/A3/A-. This suggests upgrade potential for S&P’s BBB+ and Moody’s Baa2 ratings. Fitch’s A- rating appears to be on target. Also, Slovakia moved into this group with a one notch drop in its implied rating to A+. Lastly, Latvia’s implied rating improved a notch for the second straight quarter to A/A2/A, suggesting growing upgrade potential for actual ratings of A-/A3/A-.
Within the BBB credits, scores were also mixed. Portugal’s score improved while Italy’s was unchanged. Both implied ratings were steady at BBB+/Baa1/BBB+ after moving up a notch last quarter. However, there is still upgrade potential for both. Cyprus’ implied rating stayed at BBB-/Baa3/BBB-, and still suggests upgrade potential for actual ratings of BB+/Ba3/BB.
Within the B credits, Greece’s score implied rating moved up a notch to BB-/Ba3/BB-. This suggests even greater upgrade potential to actual ratings of B/Caa2/B-. All three seem to be too pessimistic.
Given the different path this quarter for scores and implied ratings, it is clear that fundamentals are still taking divergent paths for some countries across the DM universe. Many improved this past quarter, but some are still deteriorating. We continue to believe that our model helps to identify the winners and the losers within the ongoing divergence trend across most markets.